Want to go into business with someone else? The simplest and quickest way is to form a general partnership (or GP). Just get your business partner or partners together, start working, and there you have it—your GP has been formed.
Of course, running a business is never that simple. All sorts of issues can arise after formation. If you’re considering forming a partnership, check out the following answers to frequently asked questions about this popular business structure.
What Is a Partnership?
A partnership is a business structure with one or more partners sharing equally in profits, decision-making, and liability. The default structure is known as a “general partnership” in which all partners can be held responsible for the actions of the other partners and are liable for business debts.
How Is a Partnership Formed?
There is no paperwork requirement to start a partnership, though your state or local government may require licenses or permits to operate certain businesses. Your state’s laws on partnerships will automatically apply if you don’t have a partnership agreement, which can prepare you for any scenario, such as a partner retiring or passing away. Most states have adopted a form of the Revised Uniform Partnership Act of 1997, which is a model set of rules created to govern common types of partnerships.
Are There Different Types of Partnerships?
Generally, there are three common forms of partnerships: general, limited, and limited liability. A fourth partnership structure—the limited liability limited partnership (yes, you read that correctly)—or LLLP, provides even more protection against liability and is not recognized in every state. Partnerships are completely different from limited liability companies (LLCs) and corporations.
General Partnership vs. Limited Partnership
A GP is formed when one or more owners get together and start doing business. If you have a low-stakes business idea and you trust your business partners, this type of business formation may work for you. In most states, the following apply to general partnerships:
- Joint and several liability. These legal terms mean partners are responsible both as a group (jointly) and as individuals (severally) for the activities of the business. If the business fails, the assets of the partnership and the assets of the individual partners are at risk. Each partner is held responsible for the other partners’ dealings on behalf of the partnership.
- Equal control. General partners share in decision-making equally, as well as taking equal shares of profits and losses.
- Dissolution. By default, if a partner dies or otherwise pulls out of a partnership, the entire partnership dissolves. A written partnership agreement can prevent dissolution by spelling out how the business should continue if a partner leaves.
A less common type of partnership is the limited partnership. LPs consist of at least one general partner and at least one limited partner. General partners run the show and are liable for business debts, while limited partners (also known as “silent” partners) contribute capital to the business but do not engage in decision-making.
Limited partners are not held personally liable for business debts past the amount they’ve contributed. Some states or partnership agreements allow limited partners to engage in minimal decision-making, such as voting on certain issues, without changing their partner status.
Limited Liability Partnership (LLP)
In a limited liability partnership, all partners are shielded from personal liability for business debt or decisions of other partners. This is a common structure for licensed professionals such as accountants or lawyers, who, in some states, are not allowed to form LLCs to provide such services or could otherwise be harmed by malpractice suits against other partners.
How Is a Partnership Taxed?
By default, partnerships are considered “pass-through” business entities, meaning the partnership does not pay taxes to the federal government – instead, the profits and losses “pass through” to the partners’ personal income. Partners are not considered employees of the partnership, but general partners pay self-employment taxes.
Can an LLC Be a Partnership?
If formed by more than one person, is an LLC a partnership? No, but it would, by default, be taxed like a partnership. LLCs are formed by filing paperwork with the state and shield their members from liability. Partnerships, on the other hand, can be formed simply by doing business and do not automatically protect against liability.
In both LLCs and general partnerships, business income “passes through” to the members’ or partners’ personal income. LLC members pay self-employment taxes like general partners.
LLC vs LLP
What’s the difference between an LLC and an LLP? To start, LLPs are not recognized in every state and can be limited to certain professions. While LLCs can be taxed as partnerships, sole proprietorships, or C- or S-corporations, LLPs can only be taxed as partnerships. In an LLP, partners are not responsible for the bad behavior of other partners but may still be liable for general business obligations. LLC members are not personally liable for general business obligations.
Partnership vs Corporation
Corporations are more difficult to form and must meet ongoing filing, meeting, and taxation requirements. Corporations are considered separate legal entities from the owners and automatically provide limited liability. Partnerships are less formal and do not automatically protect against liability.
Can Partners Leave the Partnership?
In a general partnership, if a partner retires, dies, or otherwise wants to pull out of the partnership, it will dissolve. Partnership agreements can provide other options if a partner wants to leave, so it is best to think through those scenarios and have such an agreement in place from the start.
Which Partnership Is Right for You?
For a low-stakes business with people you trust, a general partnership can be a quick and easy way to do business. For more risky business ventures, or if you’re seeking outside investment, limiting your liability may be worth doing. If you offer services requiring state licensure such as legal or accounting services, find out if your state recognizes LLPs.
Start Your General Partnership the Smart Way
While partnerships can be created informally, it’s always best to protect yourself in business. An experienced formation company can help you lay the right groundwork for your general or limited partnership.